Owners and Charterers – question four

Fast-paced regulatory, technological and contractual change continues to drive maritime decarbonisation, with numerous fresh challenges emerging day-to-day.

To assist you in navigating these changing times, by focusing on the practical issues likely to impact your business directly, we continue 2025 by illuminating five key maritime decarbonisation questions.

This week we ask: You intend to reduce greenhouse gas (GHG) intensity and emissions through the use of biofuels, what does that mean for your charterparties and fuel supply contracts?

Legal context

FuelEU Maritime (FuelEU) regulates from 1 January 2025 the greenhouse gas (GHG) intensity of energy used on board ships. From 2028 the International Maritime Organisation (IMO)’s recently approved Net Zero Framework (NZF) will (if adopted and accepted by the IMO later this year) regulate the GHG intensity of marine fuels on a global basis. These two pieces of regulation amplify the incentive to use biofuels already established by the IMO’s Carbon Intensity Indicator (CII) regulations and the EU’s Emissions Trading Scheme (EU ETS).

For time charterers with responsibility for fuelling the ship, and to whom liability for penalties and costs associated with FuelEU, NZF, CII and EU ETS will likely be transferred under the time charterparty, the uptake of biofuels is likely to be an attractive and available mechanism for reducing GHG intensity and emissions. However, the typical terms of a time charterparty do not adequately address the issues which arise when introducing biofuels to the ship and amendments will be needed.

Why does it matter

The time charterparty sets out important provisions relating to the fuelling of the ship, including the physical specification of the fuel to be provided by Charterers, the way the fuel should be handled and how quantities of fuel on board at delivery and redelivery of the ship are to be dealt with as between Owners and Charterers. However, time charterparties do not usually address the issues arising when the ship is fuelled on biofuel, such as:

• Owners’ competence to handle different types of fuels,
• when and under what circumstances biofuel may be consumed, or
• how biofuel, which typically has a higher value than fuel usually consumed by ships, is to be handled on delivery and redelivery.

The parties to a time charterparty therefore need to consider the issues arising where biofuels are to be used, decide how those issues will be handled and how risks will be allocated and amend the terms of the charterparty accordingly. Charterers will also need to go further and consider and revise the terms of fuel supply agreements, which do not typically address issues such as:

• the required GHG intensity of fuel supplied,
• which feedstocks are permissible and prohibited, or
• the provision of proof of sustainability documentation.

Addressing such issues is important because the benefits of using biofuel (reduced GHG intensity and emissions) can only be counted under the regulations if the biofuel meets sustainability criteria set out in the relevant regulation. If a biofuel (and its associated proof of sustainability documentation) does not comply with those criteria it will not be awarded the lower emission factor attributed to fully compliant biofuels, and may even be awarded the emissions factor of the least favourable fossil fuel comparator.

Furthermore, biofuels are expensive and capable of damaging the vessel if handled incorrectly. It is in Charterers’ interests to ensure they are protected from any mishandling of biofuel by Owners and carefully define when biofuels are to be consumed and whether and at what price title to any biofuels on board at delivery or redelivery is transferred between Owners and Charterers.

Charterers failing to address key issues and provide for those contractually, in the time charterparty and the fuel supply contract, risk a situation in which they have purchased an expensive fuel but are unable to realise the anticipated benefits whilst also being liable for penalties and costs incurred pursuant to emissions regulations.

If the relevant issues are addressed and Charterers are able to realise the anticipated benefits of using biofuels, a further consideration arising is how to approach the pooling of any surplus where the required level of compliance has been exceeded and a transferable and tradable benefit is rendered.
Source: Stephenson Harwood